RBI proposes Rs5,000 crore separate IRF investment window for FPIs

The limits prescribed for investment by FPIs in Government securities will then be exclusively available for acquiring such securities. Photo: Aniruddha Chowdhury/Mint

Mumbai: In order to attract more foreign funds, the RBI has proposed to institute a separate limit of Rs5,000 crore for investment by FPIs in interest rate futures (IRF). Currently, the FPI limit for Government securities is fungible between investments in securities and investment in bond futures.

“To facilitate further market development and to ensure FPIs access to futures remains uninterrupted during the phase when Foreign Portfolio Investors (FPIs) limits on government securities are under auction, it is proposed to allocate FPIs a separate limit of Rs5,000 crore for long position in IRFs,” RBI said.

The limits prescribed for investment by FPIs in Government securities will then be exclusively available for acquiring such securities, it said, adding, FPI’s access to interest rate futures for hedging purposes will continue as before. “The circular in this regard would be issued by the RBI after consultation with the Government,” it said.

An IRF is a contract between a buyer and a seller for future delivery of an interest-bearing security such as government bonds. The product provides market participants a better option to hedge risks arising from fluctuations in interest rates. Market participants like banks, FPIs, insurance companies, corporate houses and NBFCs can also trade in this product.

Besides, government would soon release simplified hedging facility to encourage a more dynamic and efficient hedging culture. The scheme of simplified hedging facility was first announced by the RBI in August 2016 and the draft scheme was released on 12 April, 2017.

“The scheme aims to simplify the process for hedging exchange rate risk by reducing documentation requirements and avoiding prescriptive stipulations regarding products, purpose and hedging flexibility,” it said. It is also expected to encourage a more dynamic and efficient hedging culture, it said.

“The circular to operationalize the scheme has been finalized and will be released after the issue of FEMA notification by the Government,” RBI said.